Moscow. June 30. INTERFAX.RU – equity capital markets before leaving for summer vacation still wait for the truly ambitious host: gold mining company OJSC “Polyus” practically before the closing of the business season has spent SPO, became the largest public offering by a Russian company this year.
Life “Pole” in the stock market began in 2006, after the separation of the company from Norilsk Nickel. Over the past ten years the company changed its shareholders, institutional and legal structure, assets acquired, lost and re-gained popularity among investors. Two years ago, “pole” bought their Depositary receipts and left the London stock exchange, retaining only a very small percentage of shares in circulation on the “Moscow stock exchange”. Under the SPO the company and its shareholder has sold the paper nearly $800 million, essentially turning the deal into a full-fledged return of the “Pole” on the public market.
The days when companies, using a fashion on Russian stocks abroad was placed as far as possible expensive, leaving buyers with no upside between or even with the loss, passed. The owner of the “Pole” allowed the market to enter the company at a discount, solving the dilemma of the selling shareholder in favor of the qualitative composition of investors. However, the discount in the transaction “Poles” – not just the gift of a generous majority shareholder, because the large projects in the gold mining always involves risks.
Game on trust
The output of the “Pole” on the equity markets was preceded by a long tedious wait. In April 2016, “Moscow exchange” in advance have included the shares “the Pole” in the top quotation list. Formally, for receiving the first and second levels of listing of the company’s free float should be at least 10% , and the share of actions “Poles” in the free float to this level clearly falls short. The company then promised that “over the next several months” to reach the required threshold and including considering the possibility of carrying out SPO. At the end of December 2016, the Board of Directors of “Pole” took the decision on the placement by open subscription of additional shares in the amount of 15% of the current share capital of the company. But to place the shares of the company was in no hurry.
The initial public offer was accompanied by numerous rumors, citing a variety of sources in the market have circulated assumptions about selling up to 25% of the company to investors from China and, perhaps, Qatar. At the end of may rumors are all the same shape in the real deal – a consortium of investors led by Chinese company Fosun billionaire Guo Huancane announced the purchase of 10% of the “Pole” at the price of $70,6025 per share. Fosun also got an option on 5% of Polyus for $77,6628 per share. Thus, the sum of the two transactions is up to $1,375 billion Fosun at the same time with the intention to buy a small package, “Pole” (0.28% of the capital) announced the Russian direct investment Fund. The closure of this transaction is expected before the end of the year and linked to the completion of the transaction with Fosun.
A few days after the disclosure of these transactions Polyus officially announced its intention to conduct SPO.
Speaking Friday at the “Moscow stock exchange” at the ceremony dedicated to the SPO of the company, the General Director “Poles” Pavel Grachev thanked the management of the exchange for trust. “You know that we were included in the first quotation list advance in the last year. I am proud that we have fulfilled those commitments and achieved the desired result,” he said.
“It’s not just the initial placement, it is the renewal of our public history, it began long ago, there was a period when the company had a primary listing on the London stock exchange, after which we moved its head office to Moscow, and now, after less than two years back on the “Moscow stock exchange” as on the main platform, releasing additional shares and converting of the secondary tranche,” – said Grachev.
The term “resumption of public history” used in the materials for the transaction and banks organizers – one of them, for example, presented to investors posting as “RE-IPO”.
High quality, but at a discount
Officially, the order book for shares of the company was opened on 15 June, the bookbuilding lasted two weeks. The range of the offering price was $66,5-70,6 per share, with the lower boundary assumed discount to a deal with Fosun (in the framework of the company was valued at $9,005 billion), which many investors have called the real benchmark of the cost of “Poles” for placing their bids.
Investors were offered ordinary shares traded on the “Moscow exchange”, and global Depositary shares (GDS) to be admitted to trading on the London stock exchange.
Estimates of banks-arrangers of the transaction was substantially above the announced range. According to the report, “VTB Capital”, the fair value of the company amounts of $10.1-13.1 billion, according to Sberbank CIB – a $10.8-13.1 billion, However, preliminary estimates for such large-scale public transactions, as a rule, strongly differ from that offered to investors in fact – and “pole” here is no exception.
The day before the end of collection of applications, it became known that the order book for the company’s shares oversubscribed at a price of $66,5 per share, i.e. at the lower end, and investors is directed to this transaction price. In the end, this landmark became the offering price.
The total volume of the SPO “Pole” – $799 million excluding the option of the organizers, $879 million, with an option. Including 6 million 15 38 thousand shares for $400 million puts the company itself, 6 5 million 404 thousand shares for $399 million – the structure of its main shareholder, Kerimov said. The total amount of the SPO is 9% of capital excluding the option at the additional floatation. Capitalization of Polyus on the basis of the offering price and subject to the additional issue amounted to $8,882 billion For comparison, in the fall of 2015 the structure of said Kerimov bought shares in Polyus Gold from other shareholders on the basis of the assessment of the group $9,005 billion, which is substantially more expensive than they were now sold to new shareholders.
The scheme is as follows: the total amount of accommodation (excluding the put option, amounting to 10% of the sold under the SPO package) is about $800 million – it involves an additional issue of $400 million and the shares owned by Kerimov’s structures almost the same amount. Thus, from the shareholder’s shares sell and Polyus Gold International Ltd (PGIL), and its subsidiary Polyus Gold plc. The last takes of the action “the Pole” from the parent company loan and their implementation repurchases issue of “Pole”, returning the purchased new shares of PGIL.
As explained to “Interfax” one of the bankers, in fact, under this scheme, de-facto sold the existing stock, and then part of the money is reinvested in the company. “This is a standard structure for transactions with the Russian PAO, it was created solely for the convenience of foreign investors,” he said. That is, formally, the primary component in the transaction is not, as investors sold already issued shares “the Pole”, but in fact, the primary and secondary component in the SPO were equally represented.
The joint global coordinators and joint bookrunners for the deal were Goldman Sachs International, JP Morgan, Sberbank CIB and “VTB Capital”, joint bookrunners – BMO Capital Markets, Gazprombank, and Morgan Stanley.
Polyus intends to use the proceeds to pay part of the outstanding indebtedness, the financing of production activities, projects and capital expenditures and for other General corporate purposes.
Lock-up for “Pole” and the selling shareholders will be 180 days.
Before placing the main shareholder of Polyus – PGIL said Kerimov – owned shares 91,73%, of 1.51% was Treasury package. According to the results of the SPO, PGIL’s share will drop to about 83.1% of (excluding the option at the additional floatation), Treasury package to 1.4%.
Following the transaction, the company’s free float will increase from 6.76% to 15,5%. If the option for the additional floatation will be realized up to 16.4%.
The main buyers of shares in Russian gold miner’s steel foreign investors – their share in the placement was around 90%, said Boris Kvasov, managing Director of equity capital markets “VTB Capital”, acted as one of organizers of placing.
“The share of investors from the UK accounted for about half of the shares under the placement. Russian investors bought just over 10%, the same accounted for investors from continental Europe. Almost 20% of the shares were purchased by investors from North America, including Canada, which is not often look for Russian transactions on the equity markets. Investors from the Middle East purchased less than 10% of the shares”, – said the banker.
He noted the high quality of the investors in the deal: most of them were long-term investors – their share accounted for almost 80% of all allocations, including sovereign wealth funds, representing slightly less than 10%. Russian pension funds, according to Boris Kvasov, also participated in the transaction, their share was less than 1%.
“There was a demand from individuals, they took part in the exchange tranche, but their share in total volume of demand is negligible,” he added.
“The results of the offers more than 80 institutional investors bought shares. The Top 10 allocations accounted for about 60% of the proposals”, – said the Director of “VTB Capital”.
He also noted that by the end of the transaction the company will be able to count on getting into the MSCI Russia index. “We expect the shares “the Pole” in the MSCI index following the November rebalancing. Do not see this limitation, because the company will meet all the criteria for inclusion in the index,” said Boris Kvasov.
“We are absolutely happy. Rarely on the market, you can buy an asset of such high quality and so substantial discount,” – said to “Interfax” one of the investors involved in the acquisition of shares of the company. His bid organizers have not met fully.
“I would not consider the company’s shares are too cheap. The risk that something goes wrong, the output is always high, and the market offer to pay now based on the fact that everything is guaranteed to be done in time,” said another investor who was interested in any securities of Polyus.
Not cheated Polyus attention to the main participant in all the last major Russian deals in the equity markets – the Russian direct investment Fund. A consortium of investors formed by the Russian direct investment FUND together with sovereign wealth funds in the Middle East, participated in the SPO of the company. Thanks to the RDIF placement of shares was attended by investors from countries such as UAE, Qatar, Kuwait and Bahrain. The head of RDIF Kirill Dmitriev noted that the consolidated demand reflects the interest of international investors to the Russian high-quality assets in the mining and metallurgical industry.
“Despite the fact that “pole” deserves a premium to peers for its excellent asset quality, high revenue growth and a dividend yield of 6-7% against the 1% by the index of global miners, the issue was even with a discount to peers, which for investors is good news. Most likely, the discount is due to the fact that the owner of “Pole” guaranteed wanted the company in November fell in the MSCI index,” said to “Interfax” the head of the Directorate of analysis of the market shares of UK “URALSIB” Vadim Kotikov.
Assets and dividends
Polyus is the largest Russian gold mining company, is in the Top 10 global gold producers. By the end of 2016, “pole” produced 1,968 million ounces of gold, the plan for the current year – 2,075-2,125 million ounces with a further increase to 2.35-2.4 million ounces in 2018 and 2.8 million ounces in 2019.
Current assets of the company are located in Krasnoyarsk Krai, Irkutsk oblast and Yakutia. By the end of 2017, Polyus plans to start operation of the Natalka Deposit in the Magadan region. This is a large greenfield project, the launch of which has been repeatedly postponed. According to the “Pole”, the completion of the Natalka project requires about $246 million in addition to the already spent $2,031 billion annually, But this asset can contribute to the production of “Pole” 420-470 million ounces of gold.
In early 2017, the joint venture “the Pole” and “Rostec” also bought the license for the Deposit Sukhoi Log (now in the SP at the “Pole” of 54.6%, but there is an option to increase the stake to 74.9%). JORC resources at Sukhoi Log are 58 million ounces of gold with average grade 2 g/t Polyus estimates project capex of $2-2. 5 billion over 8 years, production capacity is around 1.6-1.7 million ounces of gold a year. Sukhoy Log – one of the world’s largest gold deposits, licensing, which the market was waiting for about 20 years.
The agreement with Chinese investors, Fosun provides the minimum amount of dividends “Poles” – not less than $550 million a year at the end of the 2017-2019 years and at least $650 million in the year 2020-2021 years. According to the “VTB Capital”, “pole” may propose to the shareholders a dividend yield of 4.4-6% in 2017-2018, increasing to 4,8-6,2% in 2019 with the release of Natasha at full capacity.
Formal dividend policy “Poles” assumes payment of 30% of the EBITDA under IFRS. In mid-July, Polyus plans to pay to shareholders of $354 million: regular dividend of $254 million, representing 30% of EBITDA for the second half of 2016, as well as a special dividend of $100 million in connection with the sale of shares in Nezhdaninskoye field.
According to the “VTB Capital”, on dividends for the first half of 2017, “pole” can spend about $220 million That is a total of 6 months Polyus may pay shareholders about $570 million, according to the estimations “VTB Capital”, represents a dividend yield of 4.4-5.7 per cent.
BKS analysts believe that the shares “the Pole” look attractive: multiplier P/E “Pole” is 8.2 x against more than 15x estimated to have the second largest gold producer in Russia and the leader on extraction of silver. With this companies “the pole” compared analysts of investment banks, evaluating the company before the transaction.
The key risk for the “Pole” BCS considers the price of gold, which, according to the investment company, is too high. “We believe that in the medium term, the fed will raise rates, which in turn will lead to higher real interest rates – the traditional negative factor for gold,” wrote analysts BKS in his review.